Category: Trade
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(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

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The present euphoria about the U.S. being able t0 win a trade war with China is fueling the stock market to new highs. While, consumers reading the tariff headlines are beginning to pull up purchases scheduled for a later time. This author talked with a consumer who heard that tariffs were going up 25 % in January, 2019 so she wanted to move her purchase of a refrigerator up to now just in case. She didn’t know if refrigerators were even going to be taxed or if the tariffs were going to happen for sure. The tariffs are creating a buying contagion. This buying fever is catching on with businesses too, as the West Coast ports report 4 times the normal amount of freight volume being offloaded last month.

This urgent pulling forward of buying has happened before on a large scale in the U.S. in 1999. The year 2000 fear that software would not be able to handle the switch from 1999 to 2000 due to program limitations triggered both corporate buyers and consumers to purchase new hardware and software that would fix the bug. Sales were pulled forward into 1998 and 1999 then in 2000, sales dropped fast ‘like the lights were turned out’ the CEO of HP, Carly Fiorina said.

Source: Statista, 9/23/18

Computer software and hardware sales in stores fell 20 % by 2000 and another 19 % the following year. Computer and software companies laid off workers, companies with high levels of debt defaulted and a recession ensued. Note that even as sales began to come back up by 2008 another recession hit slowing sales progress until reaching par level with 1998 in 2011.

Consumers and businesses are hit by the tariffs in several ways: first, they see prices go up due to contagion buying from fear of prices going up, second there is a lack of merchandise as suppliers run out of product and finally when tariffs kick in the buyers are hit with another rising price wave.

Next Steps:

We have outlined in earlier posts the disastrous effects of broad trade tariffs with no clear goal in mind hurting consumers and businesses alike with high prices, loss of contracts and reduction in jobs. The latest round of tariffs on $200 billion in Chinese goods is ratcheting up the war to a new level with China retaliating with $60 billion in tariffs against U.S. goods. Plus, many businesses report non-tariff barriers being thrown up by the Chinese; slowing approval of shipments, asking for more paper work, requiring more inspections and delays in communication. Farmers in the Midwest are losing soybean contracts to Russia and Brazil as the Chinese switch suppliers. The consequential damages to the U.S. economy are mounting while the GOP Administration thinks a trade war can be won. Corporations and consumers are accelerating purchases to beat tariff dates which will create a mirage that the tariff policies are working until January 2019 arrives and sales spiral down due to all the advance purchasing.

We appeal to the White House to end the trade war, focus on the use of WTO offices, work with our allies and come up with a negotiated agreement with that is a win-win for all. If China slips into a recession from this trade war or incurs a damaged economy it will not help U.S. businesses who are looking to China as a new high growth opportunity – the Chinese will have limited cash to buy any of our goods or services. ­­­

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

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The tariffs applied last year sheltered the U.S. appliance industry for washers and dryers. What happened is a case study for what is likely to happen in other sheltered industries. Retailers rushed shipments of appliances prior to the tariffs going into effect. Prices were slashed sales went up, bringing demand forward in April. By July of this year sales are down almost 3%. While appliance sales falling can be partly explained by the slowdown in housing sales, this trend does not explain the price increases buyers in the market did experience. Samsung and LG competing with U.S. manufacturers, GE and Whirlpool, increased prices from 4 – 8 % on their models due to the tariffs. U.S. manufacturers raised their prices as well, so consumers ended up paying more anyway. If anything, prices should have been going down with fewer buyers in the market, instead there was a distorted market.

Sources: Department of Commerce, The Wall Street Journal – 9/18/19

The South Korean manufacturers have already made permanent moves to end the price challenge with Samsung producing appliances in a plant near Newbury County, South Carolina beginning this past January. LG is following suit, by opening a plant near Clarksville, Tennessee this fall.

So, what has happened is consumers will pay more for appliances, and jobs will come to the U.S. which the tariffs may have intended. Consumers are paying the price of the switch and it is not clear if the consumer will be better off.

Next Steps:

With the U.S. manufacturers depending on tariff shelter protection, they may not be as competitive as they could be with their competition coming on shore to take them on from a U.S. staging point. Certainly, with plants in the U.S. there is a level playing field for all the appliance companies. Consumers are likely to pay to find out which manufacturer is best and will be around 5 years from now.

We don’t like to see the federal government picking winners and losers in the marketplace. Capitalism, entrepreneurship and innovation should take over providing the best products at the lowest price for consumers. We prefer to see the government ensuring there is a level playing field and true competition. Time will tell us if the tariff move was an good one for consumers and the economy.

Last Friday, President Trump’s tweet doubling tariffs on aluminum and steel from Turkey caused a major shock to the Turkey stock market and sent the lira spiraling down by 10 %. However, the damage was not contained to just Turkey, emerging country currencies around the world took hits, the U.S. SPX took a .71 % dive. Emerging countries with similar high debt levels like South Africa and Argentina took 2 % or more hits to their currency values. The correlation of the lira with other emerging market currencies hit a new high today, according to Bloomberg.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Our President chose to lob an economic bomb at a country already reeling from a 40 % drop in the lira year to date, high inflation at 15.85 %, ten year bond rate of 20 %, and a corporate $210 billion net currency account deficit owed to foreign investors.

Investors are concerned that EU banks holding loans or positions in Turkish banks could be vulnerable to losses. The European Central Bank is concerned with exposure of banks in Spain, Italy and France.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

U.S. banks do not hold many direct positions in Turkish banks or loans, but they do hold positions in EU banks in the three exposed countries.

The crisis was in the making, when President Erdogan took office in July after 15 years of rule declaring super powers to himself sending the lira into a flash crash. Over the past month Erdogan insisted on keeping interest rates low, allowing inflation to get out of hand, and used foreign investment to build shopping malls and construction projects rather than invest in industry, productivity or critical infrastructure. Today, the lira was falling quickly during the day, until its fall was steadied by Turkish central bank interventions, yet stock markets in U.S. were down with SPX losing .40 %, the Dow off by .50 %, and emerging markets down by 1.62 %. All this financial uncertainty about loans, bank exposure, and foreign capital reserves has caused investors to hit the pause button to wait and see how officials around the world respond to the crisis. The most critical question: can this financial crisis be contained to Turkey, Argentina and South Africa or will developed country markets be hit?

Next Steps:

We see economic bomb throwing via tariffs to gain supposed political advantage to secure the release of a pastor as a major mistake. The added tariff on top of present tariffs on Turkey already in financial straits just exposed other emerging markets to investor and official scrutiny causing alarm and uncertainty. Uncertainty is the big cloud growing stronger as world markets deviate from U.S. markets in the past several months.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

This divergence won’t continue, either the U.S. market will fall or the emerging markets will rise – with global economies slowing, currency weakness and tariffs it would seem that U.S. markets are likely to fall. Plus, the U.S. dollar strengthening versus emerging country currencies makes U.S. goods more expensive for global customers resulting in a reduction in U.S. sales.

Is this what the President wants; falling emerging markets eventually leading to the U.S. economy going into a recession? One crucial aspect of financial markets is that perception can become reality, just the perception that a country can’t pay its debts, or a bank may fall is enough to cause investors to run for the exits. The President by making an impulsive tweet into a fragile financial system will only lead to more uncertainty, falling markets and economic disaster. Economically damaging a NATO partner like Turkey only plays into the hands of Russia in establishing closer economic and strategic ties. America has a military partnership with Turkey at the Incirlik Air Base, where over 5,000 U.S. airmen are stationed used for monitoring Russian military exercises and staging for operations into Syria and Iraq. Undermining the economy of our NATO partner may create enough civil unrest to force us to leave the base. We need to recognize that our military presence around the world keeps countries safe for us and all companies to conduct business, otherwise markets shrink. The The White House needs to think in terms of what their tariff and protectionist policies are doing to the economies of countries our companies want to sell products to. If offshore prospective customers are in falling economies they won’t have the money to buy U.S. products. So, how will the trade deficit be reduced? These poorly thought out short term trade policies need to be ended and sound long term, trade programs focused on building economies need to be implemented. This Administration needs to follow the trade path of the past 50 years by both Democratic and Republican administrations.

Update: August 14, 2018 – President Erdogan declared the country is in an ‘economic war’ telling citizens to boycott American electronic products, sell dollars and euros to support the lira. This tit for tat retaliation is exactly what we don’t want to see trade relationships spiral into uncontrollably. What if China uses nationalism to drive boycotts of U.S. goods? The deadline for the U.S. imposing new tariffs is August 23rd we will watch the action with great concern. Economic nationalism will cause worldwide recessions and setup conditions for civil unrest. Just in, Bloomberg reports that Turkey has slapped tariffs on U.S. goods including a 50 percent tax on rice, 140 percent tax on spirits, and 120 percent on cars. Tensions continue to escalate out of control.

Almond farmers in central California have seen the price for almonds drop 10 %, along with a steep drop in shipments the past several months. The steep price drop is largely due to falling shipments to China and Hong Kong, along with a bumper almond crop.

“There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term. With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020. Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.”

The trade war needs to stop now, the pause with the EU announced last week was a good start, more needs to be done with China.

“Reverse all the ill-advised, poorly throughout and threatening oriented tariffs. Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works, we are not holding our breath – just hoping for the best but preparing for the worst.”

The Administration announced yesterday that the Department of Agriculture will begin offering direct cash subsidies to farmers impacted by the tariffs. Farmers would be compensated based on the projected size of their harvests, they can begin signing up in September. The direct payments by the government due to tariffs would be the first time ever by the Agriculture Department. In addition to direct cash payments, the government will purchase surplus food products and distribute them to food banks, schools and other nutrition programs. The cash and surplus purchase program will cost taxpayers $12 billion.

We believe the cost to taxpayers is just the start. As China and other countries hunker down, as the Administration is buying time for its tariffs, more subsidies will be implemented. Other industries in other sectors will ask for loss compensation in steel, aluminum industries and consumer products on the Administration’s tariff list.

There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term. With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020. Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.

Stop the trade war now! Reverse all the ill-advised, poorly throughout and threatening oriented tariffs. Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works, we are not holding our breath – just hoping for the best but preparing for the worst.

The financial mainstream media focus on policy declarations from White House policy spin masters like Larry Kudlow, Chief Economic Adviser to the President saying of the trade war, “it is trade dispute among family members.” Meantime, American farmer family incomes are being sacrificed as the first casualties of the trade war.

As Net Farmer Income drops along with the price of soybeans, the Chinese are cancelling their contracts with U.S. farmers and buying soybeans from Brazil and other suppliers like Russia.

Sources: China National Grain and Otis Information Center – 7/5/18

Sources: Bloomberg, China Customs – 5/18/18

It is a basic business reality that when customers go to other suppliers and secure contracts if the customer is pleased with the quality of new products they will stay with the new supplier. Our farmers are being cut out of business they have been building for decades, and now their livelihoods are being sacrificed to charge on in a lose-lose Trump Trade War (TTW). In the future, it will be difficult to impossible to get back much of the business farmers are losing as new suppliers become the incumbent.

Next Steps:

We need to stop being complacent about the costs and sacrifices of TTW, there are real costs being borne by farmers, businessmen and their families. We agree with 1100 economists who sent a letter to POTUS imploring him not to use tariffs as a mechanism for trade dispute negotiation and resolution. There is no evidence of trade wars solving trade issues, except for damaging the economies of all those countries involved, and in the case of the Depression setting the stage for WWII. The fact that the GOP Administration is minimizing the damage from their no strategy tariff program, is alarming and needs to stop. Farmers did not ask to be sacrificed for the TTW, and all the other businesses and families being hurt by this disastrous trade policy. They need our support by making our concerns known to the White House and Congress. We agree with Prime Minister Merkel who stated last week in regard to auto tariffs being renegotiated that any discussions should be pursued via the World Trade Organization in fairness to all parties. For over 40 years the United States has supported building the WTO and using trade treaties to open doors for American businesses, now is not the time to use bullying, intimidation and threats as tactics for solving economic issues.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

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Last weekend, POTUS has shifted tactics from ‘whack a mole’ to ‘whack a friend’ on trade when he declared in a tweet after the G-6 + 1 summit that Canadian Premier Justin Trudeau had betrayed the US:

“Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!” He continued in another tweet one minute later said of Trudeau’s comment, “US Tariffs were kind of insulting” and he “will not be pushed around.” Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!”

So, why is the President going after Canada anyway? Canada, our long time neighbor to the north, ally during WWII, and trade partner that we actually have a trade surplus. Yes, our trade with Canada is at a surplus of $8.4 billion in 2017, according to the New York Times, when services are added as shown below:

Canada and the US have over $693 billion of commerce between the two countries and nine million American jobs depend on trade with Canada.

In the past year, the President has picked on Canada slapping tariffs on softwood lumber causing lumber prices in the US to soar, because the US imports 96 % of the lumber it needs mostly in residential housing from Canada. POTUS has taken aim at Canada recently to include the country in the tariffs of 25 % on steel and 10 % on aluminum. Over the weekend he focused on dairy in as his tweet noted above about Canadian “270 % tariffs on dairy”.

The reason there is a 270 % tariff on dairy powder is a system of supply management that was agreed upon by the US and Canada. For most dairy products sold within the quota of US imports into Canada a tariff of 7.5 % is applied by the Canadian government. When imports exceed the supply management quotas, super charges go into effect on products like dairy powder or over quota milk at 241 %. Canada has established a supply management system with the US on dairy products, as most countries including the US subsidize their dairy industry.

Next Steps:

First, our President needs to treat our long-time ally to the north as an ally and friend to the American people with respect, dignity and cordial public discourse. Privately, he may have disagreements, and negotiations should proceed to overcome trade imbalances where appropriate and to protect American jobs.

Second, the facts need to be used, not falsehoods as POTUS admitted in his first meeting with Trudeau, that he made up the idea there was an imbalance or equality or he didn’t know. It is time to do the homework, research the facts in our relationship, preserve the on-going huge amount of commerce we already do, and figure out how to work more closely together as partners not adversaries.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

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Last Friday, POTUS announced that he was considering just dropping the NAFTA agreement. His announcement sent the Mexican Stock Market racing down with the fall continuing today:

Source: Patrick Hill, The Progressive Ensign – 6/5/2018

When President Trump was elected in November of 2016, the Mexican market tumbled, then regained when it seemed the Administration would negotiate in good faith. Then, late 2017 threats and bullying started with the latest swoon when POTUS wanted to just pull out of the agreement.

The administration continues to use a ‘whack a mole’ policy approach, even with Vice President Pence suggesting last week that the NAFTA agreement should be renegotiated every 5 years. Trade agreements are complex, legal documents which business leaders, consumers and government policy makers depend upon in making economic, infrastructure and industry plans for 10 to 20 years into the future. Corporations when they plan for building a manufacturing plan, are looking at government trade policies and trends over the next 10 years to determine whether a plant will be profitable or not. Policy makers can’t be changing the rules of the economic game constantly.

We are concerned that the anti-Mexico trade policies of the administration will continue to cause uncertainty, chaos and severe trade constraints driving the Mexican economy into a recession or worse. Mexico is the second largest trading partner for the US. States like California and Texas depend on exports to Mexico and will be hurt if the Mexican economy continues to slide:

We know from research that when the Mexican economy does better, immigration from our south of the border neighbor goes down.

Sources: Five Thirty Eight, PEW Research, The World Bank – 2/28/17

The GOP administrations needs to start treating Mexico with dignity, respect and partnership – which they have earned as our southern neighbor and ally. When the Mexican people are prospering, they don’t seek jobs in the US. So, instead of withdrawing support for NAFTA which our farmers and other businesses throughout the US are profiting by, focus on the main issue which is the imbalance in autos, trucks, automotive parts and manufacturing as the chart below describes:

Sources: US Census Bureau, The Wall Street Journal – 6/2018

Let’s start using evidence, facts and real insights in negotiating our agreements with our allies instead of bullying, prejudice and smear tactics. We recommended over a year ago, that the Administration, focus on the automative industry imbalance, and protect worker jobs and US businesses:

Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)

Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.

Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.

Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

After declaring two weeks ago a trade truce with China, POTUS declared last week that 25 % tariffs would be imposed on $50 billion of Chinese of Chinese goods if they don’t commitment to purchases of US energy and agriculture products. Commerce Secretary, Wilbur Ross left China on Sunday with no real progress except to make the Chinese angry, confused and upset.

The bullying, intimidation, zero sum negotiating tactics may work in the rough and tumble of New York real estate but not international trade where over 70 years of careful negotiations by all the major trading partners have put into place a trading platform with rules and fairness wherever possible. Now it is true that some nations take advantage of the slow, ponderous and confusing decision making of the World Trade Organization. But blowing up the present trade agreements by saying things like Vice President Pence said last week to Canada and Mexico that the NAFTA agreement should be revisited every five years is insulting, duplicitous and lacking in good faith. So last Friday, to heap more chaos on the NAFTA negotiations POTUS says he is thinking of just pulling out of NAFTA completely. Welcome to a POTUS caused trade war, we call The Trump Trade War (TTW), as history books will likely record.

Prime Minister Trudeau of Canada has condemned the way the US administration has been treating a valued partner calling the actions “frankly insulting”, and in return he receives more trumped (pun intended) up national threats. He continued in an NBC interview:

“The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat?” Trudeau declared. “Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.” Maybe our POTUS doesn’t understand that dying for a common cause is a higher value than provoking, bullying and intimidation to make an extra short term buck.

EU ministers are confused and upset at being grouped in with China in steel and aluminum tariffs. The United Kingdom, France, Germany, Mexico, Canada, Turkey and Japan have either announced or launched retaliatory tariffs on US goods and are reviving trading alliances that the US has abandoned like the TTP (Trans Pacific Partnership).

Sources: The Wall Street Journal, The Daily Shot – 6/4/18

The TPP non – US nations are in a dialog with China who is excited about filling the role the US once occupied. Experts note the long term effects and loss in business for the U.S., Adam Posen, president of the Peterson Institute for International Economics observed, “It will be hard to establish trust in the U.S. again, and all the uncertainty will drive down investment and productivity.”

US businesses are busy trying to minimize the damage to their export revenue streams,. Farmers in the midwest have already found that China has cancelled some sorghum shipments causing ships to be turned back, as the Chinese are making deals with Russia for agricultural goods. American businesses are being cut out of customer contracts now, resulting in lost business that will be extremely difficult to get back once new suppliers are in place. Still incredibly, the White House trade team blows up the present world-wide trade framework replacing it with nothing, which results in uncontrolled reprisals and chaos. Seems like economic missiles have been launched and attacked nations are sending economic missiles back (sounds like a trade war to us, the TTW (Trump Trade War).

Next Steps:

To begin, our political leaders need to stop being invisible as the world trade fabric unravels. Next Congressional leaders need to bring all key trade factions, business and trade representatives and develop an alternative to the destructive protectionist policy now being implemented. Sound trade policy based on win – win negotiations, fair agreements, protections for labor, working within the WTO, and legal order will win over allies and concessions from adversaries. The GOP administration needs to stop going it alone, and work with our allies, build consensus, and make improvements in the present painstakingly developed agreements over the past 70 years. Over 1100 economists, the US Chamber of Commerce and world leaders have condemned the declared TTW which needs to end now.

As we predicted one result of import taxes (blog of January 24) the Administration placed on imported washers was that domestic suppliers would raise prices. Sure enough they have raised prices by 7 – 15 % at a time when consumers are squeezed. As tariffs were placed on imports we forecasted that domestic manufacturers would take advantage of the higher competition prices and raise their prices as Maytag and Whirlpool have done. Their spokesman say they had to raise prices due to increasing costs of steel and aluminum yet they have raised prices before the steel tariffs went into effect. Once again corporations lobbied government to change the rules in their favor to make more profits while consumers lose.

Other manufacturers for processed goods, food and items with a high shipping cost are raising prices as well.

Sources: Labor Department, The Wall Street Journal – 5/9/18

Of major concern is a combination of higher interest rates, tariffs and competition will cause increases in producer prices that companies will not be able to pass along to consumers. Consumers are too indebted to accept the price increases. Margins are squeezed, companies lose sales, and a recession begins. Possibly the wealthy can continue to purchase major appliances and processed items but the middle class will not.

Next Steps –

The middle class is caught in the cross fire of competing interests in our economy where the Federal Reserve did keep interest rates artificially low increasing the value of financial assets like stocks, homes and consumers were able take on too much debt. The real assistance would be for the federal government to invest in jobs training, career development, Heartland regional economies, African American and Hispanic community development, welcome immigrants, and end stock buybacks. Corporations could allocate the $1 trillion in cash they are holding in accounts mostly overseas and invest in their employees – raising their wages, productivity research, decent family leave programs and giving them more voice in corporate decision making.